If My Loan Balance Exceeds My Property Value Can the Lender Come After me?
As one of the two significant aspects of a Reverse Mortgage, the non-recourse feature ranks up with the line-of-credit. A mortgage debt that accumulates beyond the value of a home is not the responsibility of the homeowner. Homeowners usually feel at rest with this feature; in that, should the property’s value decline or one or both homeowners live very long, any bill will not be transferred to their heirs.
If My Loan Balance Exceeds My Property Value Can the Lender Come After me with a deficiency judgement?
To explain it in simple terms, “NONRECOURSE” means that “THE HOME REPRESENTS THE DEBT” … NOT the homeowner or their heirs. Another concise explanation is that “there is NO RECOURSE for any mortgage loan shortfall beside the home.” Meanwhile, the perfect definition of the non-recourse feature is:
“FHA assures that no borrower will owe more than the value of the home at the time of its sale.”
Here’s a fun fact!
In 1981 the White House Conference on Aging recommended that “FHA should develop an insurance program for reverse mortgage loans”
This should be a relief to all homeowners and their heirs. They have the assurance that if a homeowner lives very long, or if the value of the property drops, FHA will pay a claim to the lender to ensure that nobody suffers from the loan getting deficit. To cater to this fact, FHA collect mortgage insurance premiums. The Mutual Mortgage Insurance Fund (MMIF) that FHA established is gather funds for this purpose. And this is the essential consumer protection that makes HECMs very attractive.
First, know that the loan balance CAN go beyond the home’s value. The lender is not carrying out assessments from time to time and stopping the interest accumulations. The homeowner is not accountable for the amount that exceeds the value of the home when it is sold.
Here is an example of Non-Recourse
At the beginning of her loan, Mary had $75,000 equity in her home and had a Reverse Mortgage. Meanwhile, this could change. Due to its accumulating interest, the loan balance will increase. If she lives long, takes future draws, or the value of the home falls, she could have a loan balance that surpasses her home value. From the illustration, Mary’s home value dropped simultaneously as her loan balance increased.
Therefore, her equity position changed. Her equity was $75,000 in the beginning but later became $50,000 upside down.
If she is upside down when she wants to sell, as shown in the second column (-$50,000), she or her heirs could sell the home for the new home value of $150,000 regardless of being upside down. And when Mary passes on, the home could be sold for $142,500 which is 95% of the value of the home, without adverse consequences for the estate.
24 CFR § 206.27. MORTGAGE PROVISIONS
Did you know?
According to an AARP study 90% of senior baby boomers want to remain in their homes. Reverse mortgages allow our seniors to access the equity in their homes while allowing them to stay in the property.
The mortgagor shall not incur personal liability for payment of the mortgage balance. It is only through the sale of the property that the mortgagee can enforce the debt. And if the mortgage is foreclosed, the mortgagee shall not be allowed to obtain a deficiency judgment against the mortgagor.
HUD Handbook 4235.1 Chapter 1-3. NON-RECOURSE
The HECM is a non-recourse loan. Consequently, the HECM borrower (or his or her estate) will not owe beyond the loan balance or the property’s value, whichever is less; and no assets apart from the home should be used to repay the debt.